NEW YORK – A paradox has emerged in the financial markets of the advanced economies since the 2008 global financial crisis. Unconventional monetary policies have created a massive overhang of liquidity. But a series of recent shocks suggests that macro liquidity has become linked with severe market illiquidity.

Policy interest rates are near zero (and sometimes below it) in most advanced economies, and the monetary base (money created by central banks in the form of cash and liquid commercial-bank reserves) has soared – doubling, tripling, and, in the United States, quadrupling relative to the pre-crisis period. This has kept short- and long-term interest rates low (and even negative in some cases, such as Europe and Japan), reduced the volatility of bond markets, and lifted many asset prices (including equities, real estate, and fixed-income private- and public-sector bonds).

And yet investors have reason to be concerned. Their fears started with the “flash crash” of May 2010, when, in a matter of 30 minutes, major US stock indices fell by almost 10%, before recovering rapidly. Then came the “taper tantrum” in the spring of 2013, when US long-term interest rates shot up by 100 basis points after then-Fed Chairman Ben Bernanke hinted at an end to the Fed’s monthly purchases of long-term securities.

Likewise, in October 2014, US Treasury yields plummeted by almost 40 basis points in minutes, which statisticians argue should occur only once in three billion years. The latest episode came just last month, when, in the space of a few days, ten-year German bond yields went from five basis points to almost 80.

These events have fueled fears that, even very deep and liquid markets – such as US stocks and government bonds in the US and Germany – may not be liquid enough. So what accounts for the combination of macro liquidity and market illiquidity?

For starters, in equity markets, high-frequency traders (HFTs), who use algorithmic computer programs to follow market trends, account for a larger share of transactions. This creates, no surprise, herding behavior. Indeed, trading in the US nowadays is concentrated at the beginning and the last hour of the trading day, when HFTs are most active; for the rest of the day, markets are illiquid, with few transactions.

A second cause lies in the fact that fixed-income assets – such as government, corporate, and emerging-market bonds – are not traded in more liquid exchanges, as stocks are. Instead, they are traded mostly over the counter in illiquid markets.

Third, not only is fixed income more illiquid, but now most of these instruments – which have grown enormously in number, owing to the mushrooming issuance of private and public debts before and after the financial crisis – are held in open-ended funds that allow investors to exit overnight. Imagine a bank that invests in illiquid assets but allows depositors to redeem their cash overnight: if a run on these funds occurs, the need to sell the illiquid assets can push their price very low very fast, in what is effectively a fire sale.

Fourth, before the 2008 crisis, banks were market makers in fixed-income instruments. They held large inventories of these assets, thus providing liquidity and smoothing excess price volatility. But, with new regulations punishing such trading (via higher capital charges), banks and other financial institutions have reduced their market-making activity. So, in times of surprise that move bond prices and yields, the banks are not present to act as stabilizers.

In short, though central banks’ creation of macro liquidity may keep bond yields low and reduce volatility, it has also led to crowded trades (herding on market trends, exacerbated by HFTs) and more investment in illiquid bond funds, while tighter regulation means that market makers are missing in action.

As a result, when surprises occur – for example, the Fed signals an earlier-than-expected exit from zero interest rates, oil prices spike, or eurozone growth starts to pick up – the re-rating of stocks and especially bonds can be abrupt and dramatic: everyone caught in the same crowded trades needs to get out fast. Herding in the opposite direction occurs, but, because many investments are in illiquid funds and the traditional market makers who smoothed volatility are nowhere to be found, the sellers are forced into fire sales.

This combination of macro liquidity and market illiquidity is a time bomb. So far, it has led only to volatile flash crashes and sudden changes in bond yields and stock prices. But, over time, the longer central banks create liquidity to suppress short-run volatility, the more they will feed price bubbles in equity, bond, and other asset markets. As more investors pile into overvalued, increasingly illiquid assets – such as bonds – the risk of a long-term crash increases.

This is the paradoxical result of the policy response to the financial crisis. Macro liquidity is feeding booms and bubbles; but market illiquidity will eventually trigger a bust and collapse.

THE slowdown in China’s property market has been cruel to makers of wooden flooring. After double-digit growth for much of the past decade, sales have slumped. Kemian Wood Industry, which used to boast of the quality of its composite floorboards, took radical steps to deal with the downturn. It switched its focus to online gaming and changed its name. After its rechristening as Zeus Entertainment in early March, its share price doubled in short order. This past week, though, its transition plan hit a snag. CCTV, the state broadcaster, accused it of being one of a series of companies that are “fabricating themes and telling stories” to inflate their share prices.Zeus Entertainment denies the allegations. But the wider trend is clear. At least 80 listed Chinese firms changed names in the first five months of this year. A hotel group rebranded itself as a high-speed rail company, a fireworks maker as a peer-to-peer lender and a ceramics specialist as a clean-energy group. Their reinventions as high-tech companies appear to have less to do with the gradual rebalancing of China’s economy than with the mania sweeping its stockmarket.The Shenzhen Composite Index, which is full of tech companies, has nearly tripled over the past year. Even frothier is ChiNext, a board for startups that is now valued at 140 times last year’s earnings (see chart 1). A multiple of 50 would already be very optimistic for even the whizziest firms. ChiNext is supposed to be China’s answer to NASDAQ. It does indeed closely resemble NASDAQ—but as it was in 1999, just before the dotcom bubble went pop. There is no telling when the Chinese frenzy will end, but a sharp correction seems inevitable. Such a reversal would cast a long shadow over China’s economy..

As in any bubbly market, there is a debate about just how inflated Chinese stock prices are. The average price-earnings (PE) ratio on the Shanghai Stock Exchange, home to the country’s biggest firms, is 23—lofty but not much higher than America’s S&P 500 share index. That, however, is a skewed picture. Banks have the heaviest weighting on the Shanghai exchange and they have been largely left behind by the rally. (That is a warning sign in itself since bank shares tend to track the broader economy.) The median share in Shanghai now has a PE of 75. Chen Jiahe of Cinda Securities, a brokerage, calculates that nearly 85% of listed companies have higher valuations today than at the height of China’s stock bubble in 2007—which ended in a big bust. Global investors are not buying into the mania: the shares of companies listed in both Hong Kong and Shanghai are now 30% more expensive in the latter.Examples of excess abound. A pet-food company trades on 221 times earnings, a sauna-maker on 285 and a manufacturer of fans on 732. Chinese stocks have long had a tenuous relationship with economic reality, but the current rally has gone to new extremes. Growth in the first quarter fell to 7% year on year, the weakest figure since 2009. And monthly data suggest that the slowdown has deepened in the second quarter. But stocks are still racing ahead (see chart 3). Almost 8m brokerage accounts were opened in the first quarter of 2015 alone (see chart 4). A shift to monetary easing and fiscal stimulus—and expectations of more to come—help explain why the rally began. But the longer it continues, the more it looks like irrational exuberance..

One common view about the bull run is that the government is behind it, and could bring it to a halt if it chose, just like flipping a switch. The truth is that even the Communist Party, though powerful, struggles to steer the stockmarket along its desired path. Official media did talk up shares as “cheap” in the early days of the rally, but the government had tried for years without success to breathe life into the previously torpid market, cutting stock-trading taxes and freezing new listings to limit the supply of shares. In recent weeks the balance of official rhetoric has started to turn against the market, highlighting the growing risks. The report by CCTV about companies “telling stories” followed a vow by the securities regulator to crack down on market manipulation. “It’s like crying wolf. Because there have been repeat warnings but few serious consequences, investors pay even less attention,” says Shao Yu of Orient Securities, a brokerage.If the bubble does burst, it would undoubtedly hurt the Chinese economy. Leverage has played a big part in the rally: margin financing for share purchases has increased five-fold over the past year to more than 2 trillion yuan ($325 billion; see chart 2). Debt has also worked its way into the market through other channels such as “umbrella trusts”, which used to allow banks to lend to wealthy investors without encumbering their balance-sheets. Credit Suisse estimates that 6-9% of China’s market capitalisation is funded by credit, nearly five times the average in the rich world.The presence of so much leverage means that the eventual correction is likely to be sharp as investors race to repay loans. This is new territory for China. When its last bubble burst in 2007, the government had yet to allow margin financing. “Now, the odds are that it will inflict a much bigger loss on households,” says Helen Qiao of Morgan Stanley, a bank.Nevertheless, the immediate damage from a crash should be manageable for China. The free-float capitalisation of the stockmarket is just about 40% of GDP; in rich countries it is typically more than 100%. ChiNext accounts for less than a tenth of GDP. Moreover, the rally has been less helpful for the economy than often imagined. A sustained slowdown in retail sales indicates that there has been little positive wealth effect from rising share prices. Some households may have even held off from buying things to put more into the market. The corollary is that a market tumble need not spell too much gloom, at least in the short term.The longer-term repercussions of the mania are more worrisome. After the 2007 crash, investors lost faith in China’s stockmarket for years. Equity issuance slowed to a crawl. Companies had little choice but to tap banks for funding, one of the reasons why Chinese debt levels soared from 150% of GDP in 2008 to more than 250% today. Many hoped that the current rally would put China’s financial system on a better footing by allowing companies to raise more cash through equities and reduce their reliance on debt. This is only beginning: share issuance is stronger this year but still accounts for just 4% of corporate financing. If the rally turns to rout, it would undermine that shift. “Regulators want a slow bull market,” says Larry Hu of Macquarie Securities. Instead, they have a raging beast.

Greek premier Alexis Tsipras has accused Europe's creditor powers of issuing "absurd demands" and come close to warning that his far-Left government will detonate a pan-European political and strategic crisis if pushed any further.

Writing for Le Monde in a tone of furious defiance after the latest set of talks reached an impasse, Mr Tsipras said the eurozone's dominant players were by degrees bringing about the "complete abolition of democracy in Europe" and were ushering in a technocratic monstrosity with powers to subjugate states that refuse to accept the "doctrines of extreme neoliberalism".

"For those countries that refuse to bow to the new authority, the solution will be simple: Harsh punishment. Judging from the present circumstances, it appears that this new European power is being constructed, with Greece being the first victim," he said.

The Greek leader, head of the radical-Left Syriza government, issued a stark warning that his country will not submit to these demands and will instead take action "to entirely transform the economic and political balances throughout the West."

Alexis Tsipras made his thoughts known in a piece for Le Monde, the French newspaper

"If some, however, think or want to believe that this decision concerns only Greece, they are making a grave mistake. I would suggest that they re-read Hemingway’s masterpiece, “For Whom the Bell Tolls”," he said. The words originally come from John Donne's Meditation XVII, with its poignant reminder that the arrogant can be blind to their own demise. "Perchance he for whom this bell tolls may be so ill, as that he knows not it tolls for him," it reads. Mr Tsipras's article is a thinly-disguised warning that Greece may choose to default on roughly €330bn of debt in the biggest sovereign default ever, and pull out of the euro, rather than breech its key red lines. The debts are mostly to European official creditors and the European Central Bank. The situation has become critical after depositors withdrew €800m from Greek banks in two days at the end of last week, heightening fears that capital controls may be imminent. Mr Tsipras's choice of words also implies that Greece may turn its back on the Western security system, presumably by shifting into the orbit of Russia and China. The article comes as Panagiotis Lafanzanis, the energy minister and head of Syriza's powerful Left Platform, returns from Moscow after securing a provisional deal with Gazprom to build part of the "Turkish Stream" gas pipeline through Greece. The Russian energy minister, Alexander Novak, said over the weekend that the project has been agreed in principle. " We are now discussing technical details," he said. Greek officials have told The Telegraph that Russia is offering up to €2bn in up-front credit to sweeten the arrangement, though it will not be a state-to-state transaction.

Mr Tsipras visited the Kremlin in April, where he met with Vladimir Putin

Mr Lafanzanis said Greece is taking further steps to join the so-called BRICS bank, a multilateral lender created by Russia, Brazil, China, and South Africa. He hinted that this may unlock some form of "financial support" for Greece very quickly. It is unclear whether the tough language from Athens is yet more brinkmanship as the Greek crisis comes to a head in June, or whether the Syriza movement is no longer counting on any substantive shift by the creditor bloc, and has resolved to go down fighting whatever the consequences. It follows days of impassioned debates with the party, with a growing number of MPs berating Mr Tsipras for drawing out the agony by raiding local government and pension funds. The policy is leaving Greece even more vulnerable if it is forced out of EMU in the end. The Left Platform has called for a full "counter-attack" against the EU powers, laying out its inflexible terms in a new document. It demands a default on the debt and the "immediate nationalization of the banks with all necessary accompanying measures". "What the ruling circles of the EU, the ECB and the IMF are ruthlessly and consistently aiming for in the last four months, is to strangle the economy, to milk the last euro from the country´s reserves and to push a vulnerable government into full submission and exemplary humiliation," it said. Mr Tsipras was more diplomatic, but only slightly so. He said the creditor bloc was determined to "make an example out of Greece" so that no other country would be tempted to defy the austerity regime. The Greek prime minister disputed claims by the EU-IMF 'institutions" that Syriza had failed to deliver on reforms, accusing that the inspectors of turning a "blind eye" to corrupt practices under the previous government when it served their interests. The clash on labour rights is pivotal to the confrontation. Syriza has agreed to work with the International Labour Organisation on flexible work practices but says it will not abandon its core demands for full collective bargaining protection. The arguments are likely to exasperate EU and IMF officials, who deny adamantly that they are pushing an ideological line or attempting to erode progressive labour laws. Mr Tsipras appeared to acknowledge that there is little or no chance of reaching a deal with the official negotiators and technocrats. The matter has moved to a higher level and is at this point entirely political. "The decision is now not in the hands of the institutions, which in any case are not elected and are not accountable to the people, but rather in the hands of Europe’s leaders," he said.

SANTIAGO – Aside from an established tradition of bad macroeconomics, what do Greece and Argentina have in common? One answer is that they were the world’s longest-held captives of the so-called middle-income trap – and remain within its reach to this day. With countries in Asia, Eastern Europe, and Latin American fearing that, having reached the international middle class, they could be stuck there, Greece and Argentina shed light on how that might happen.

A recent paper by economists from Bard College and the Asian Development Bank categorizes the world economy according to four groups – with the top two categories occupied by upper-middle-income and high-income countries – and tracks countries’ movements in and out of these groups.

Which countries were stuck for the longest period in the upper-middle-income category before moving to high income? You guessed it: Greece and Argentina.

Correcting for variations in the cost of living across countries, the paper concludes that $10,750 of purchasing power in the year 1990 is the threshold for per capita income beyond which a country is high income, while $7,250 makes it upper-middle income. (These thresholds may sound low, but the World Bank uses similar cutoffs.)

By these criteria, Argentina became an upper-middle-income country all the way back in 1970, and then spent 40 years stuck in that category before reaching high-income status in 2010. Greece joined the international upper middle class in 1972, and then took 28 years to reach the top income group, in 2000.

No other country that became upper middle income after 1950, and then made the transition, took nearly as long. In fact, the average length of that transition was 14 years, with economies such as South Korea, Taiwan, and Hong Kong taking as little as seven years.

Data in the paper stop at 2010, but the story may well be worse today. According to IMF figures, Greece’s never-ending crisis has cut per capita GDP (in terms of purchasing power parity) by 10% since 2010, and by 18% since 2007. Indeed, Greece may have dropped out of the high-income category in recent years.

Argentina’s per capita income has risen, albeit slowly, during this period, but the country was never far from a full-blown macroeconomic crisis that could reduce household incomes sharply.

So it seems fair to conclude that both countries are still caught in the middle-income trap.

What kind of trap is it? In Greece and Argentina, it is both political and economic.

Start with the politics. In their book Why Nations Fail, Daron Acemoglu and James A. Robinson argue that societies with political arrangements that concentrate power in the hands of a few seldom excel at innovation and growth, because innovators have no guarantee they will keep the fruits of their labors. And, to the extent that outsiders cannot generate wealth, they have few resources with which to challenge the power of insiders; as a result, exclusionary political arrangements are mostly self-sustaining.

That is a useful account of why there is a poverty trap – which is the question the book seeks to answer – but it does not clarify why there is a middle-income trap. Greece and Argentina are, after all, democracies, however imperfect, and so are most of the countries in Latin America or East Asia that worry about being stuck at middle-income level. The Acemoglu-Robinson account of a single small elite pulling all the strings needs to be replaced by a different narrative, in which an array of politically powerful groups exercise veto power over decisions that affect their economic interests.

Think of powerful business groups vetoing moves to improve tax collection or strengthen competition policy. This helps explain why the Greek and Argentine governments are perennially in deficit (until borrowing options dry up and adjustment is inevitable), or why prices – and profits – are high in sectors (for example, transportation and telecoms) that provide would-be entrepreneurs with crucial (but often unaffordable) inputs.

Or think of public-sector unions vetoing changes in benefits for their members. That goes a long way toward explaining (add a bit of ideology to the mix) why the current Greek government has gone to the brink of default before agreeing to restrain public-sector pensions, as its European Union partners demand. It also helps explain why both Greece and Argentina have sizeable governments (public spending accounts for 46% and 39% of GDP, respectively) but puny public investment and outdated infrastructure.

This is not a case of too much democracy, as conservative commentators sometimes claim, but of too little. Underdeveloped democratic institutions allow for decisions that are individually rational but collectively shortsighted and harmful.

And bad politics makes for bad economics. To go from middle-income to high-income status, countries have to redeploy resources to high-productivity, knowledge- and skill-intensive sectors.

That is a transition that Greece and Argentina, with their financial instability, poor infrastructure, and weak education systems, have never made.

According to the Atlas of Economic Complexity, developed by Ricardo Hausmann and colleagues at Harvard University, the 2008 gap between Greece’s income and the knowledge content of its exports was the largest in a sample of 128 countries. By 2013, Greece ranked 48th in the Atlas’s index of complexity of exports – by far the lowest of any developed country in Europe – while Argentina ranked 67th.

Sluggish exports mean slow growth, which in turn places limits on social mobility and the expansion of an entrepreneurial middle class. That helps preserve the political power of entrenched veto-wielding players, closing the trap. Perhaps a weighty tome entitled Why Middle-Income Nations Fail will tell the story in full. Societies will then understand why high-income status eludes them – and what they might do differently.

THE Trans-Pacific Partnership (TPP), a putative trade agreement, would ease commerce between America, Japan and ten other countries that between them account for two-fifths of global GDP. But how beneficial would it be to these economies? Advocates claim it would boost their output by nearly $300 billion in a decade. Critics say it would make little or no difference.The disagreement reflects the difficulty of gauging the impact of free-trade agreements. Almost all economists accept the benefits of free trade as laid out in the early 1800s by David Ricardo. Countries do well when they focus on what they are relatively good at producing. But Ricardo looked at only two countries making two products, at a time when few non-tariff barriers such as safety standards existed. This renders his elegant model about as useful for analysing contemporary free-trade deals as a horse and carriage are for predicting the trajectory of an aircraft.Instead, most economists use what is known as computable general equilibrium (CGE) analysis. CGE models are built on top of a database that seeks to describe economies in full, factoring in incomes, profits and more. Researchers line things up so that the model yields the same output as a real benchmark year. Once that is achieved, they “shock” the model, adjusting trade barriers to see how outcomes shift, both immediately and over time.There is much to recommend CGE. It is the only trade model broad enough to encompass services, investment and regulations, all of which lie at heart of the TPP debate. It also generates predictions that policymakers want: which sectors will do well and how incomes will change. But CGE has big drawbacks. First, it is dependent on data, which can be very patchy in some areas. Second, faulty assumptions can quickly lead forecasts astray.Studies of TPP illustrate these strengths and weaknesses. The most influential, by Peter Petri, Michael Plummer and Fan Zhai, for the East-West Centre, a research institute, forecasts that the deal would raise the GDP of the 12 signatories by $285 billion, or 0.9%, by 2025. It is their numbers that America’s government cites when it says TPP will make the country $77 billion richer. Their model tries to avoid some of the common failings of CGE. Their assumptions are transparent, include a range of scenarios and are often conservative—for example, they expect only slow and partial implementation. That makes the results more credible.Yet subjective elements of the model have a huge impact. The authors use a new approach to predict that more firms will become exporters as the costs of trade decrease. That may be an improvement over previous theories, which assumed a constant number of exporters, but this one tweak greatly changes results: it makes the benefits some 70% bigger, according to a study for Canada’s C.D. Howe Institute by Dan Ciuriak and Jingliang Xiao.Some assumptions are also debatable. The researchers calculate that increased protection of intellectual property (IP) is beneficial for all countries. A review of studies of TPP funded by the British government, by Badri Narayanan, Mr Ciuriak and Harsha Vardhana Singh, questions that. Stronger protection for IP should spur more investment by producers. But it can also raise costs for consumers beyond what is necessary to encourage innovation and slow the spread of technology to developing nations.That also points to one of the many blind spots in CGE models. Most use figures from Purdue University’s Global Trade Analysis Project, the best database available. But since it was initially developed for agriculture, it is skewed. It has separate categories for raw milk and dairy products, but lumps pharmaceuticals into one overarching category for chemicals—a problem for models since TPP deals extensively with drugmakers’ IP. Given the uncertainty, Messrs Ciuriak and Xiao exclude any impact from enhanced protection of IP. They also use a more conventional model for exports. They calculate that TPP will raise the GDP of the 12 countries by just $74 billion by 2035, a mere 0.21% higher than baseline forecasts. Others see an even smaller impact. In a paper for the Asian Development Bank Institute, Inkyo Cheong forecasts that America’s GDP will be entirely unchanged by TPP.

Why bother?

That raises the question of whether TPP is worth pursuing at all. As complex as the CGE studies are, they are just models, peering into the future through a haze of assumptions. It is thus important to buttress them with studies of completed deals. The Asia-Pacific region is an ideal laboratory because it went from five free-trade agreements in 1990 to more than 200 in 2015. A new Asia-Pacific Economic Cooperation study finds that, in the five years after an agreement, participants’ exports increased on average by nearly 50% relative to the five prior years. The researchers then control for factors such as GDP and distance, isolating free-trade deals as a variable. Those with the biggest impact share certain features: they have more members, bring together developed and developing economies, and aim at non-tariff barriers as well as tariffs.This suggests that the gains to be had from freeing trade, even if diminishing, are far from exhausted. But that does not necessarily make TPP the right way forward. Almost all studies agree that its principal limitation is size: it is not big enough. Specifically, the exclusion of China is costly. The Petri study concludes that a more inclusive Pacific free-trade deal with weaker rules on state-owned firms and intellectual property would lift income gains for the original 12 TPP members, including America, to $760 billion—more than double the boost from TPP. Such precise CGE forecasts ought to be taken with a pinch of salt. But the moral is clear enough. The objective should be to bring more countries into the tent, not to push for overly strict rules.

We have a conflict in time, this weekend, so we are presenting charts only, since they provide the best information about what the market is doing, especially when almost all fundamental data has not produced the positive results they appear to indicate.The fiat Federal Reserve "dollar" remains the antithesis of gold, since the elite's central bankers do all they can to discredit the metal that makes a lie out of all the fiats issued and without taking responsibility for its ultimate destructive outcome. After all, the sole objective of the elites is to steal as much wealth from the masses as possible during their quest for a New World Order, well on its way.The chart notes indicate a greater likelihood for another rally higher, and an additional reason comes from the base out of which this fiat paper currency has rallied. You can see how the "dollar" index has been in a base TR since 2006, on this chart, and said base provides the impetus to carry price much higher than has developed, to date.The demise of the corporate federal government is pretty much a foregone conclusion, but the timing will take much longer than most people believe, as the potential for higher prices show on the charts. For as long as the toxic fiat Federal Reserve Note can prevail, so too will the elite's fading corporate federal government.As an aside, the elites could care less about the fate of the US and its population, for it has already moved East, to be covered at a later date. The US has been depleted of all of its wealth. China is now in early process. Where Russia and its vast natural wealth fits in remains to be seen.

Higher time frame charts are for a truer reflection of market context and direction, for it takes considerably more time and effort to change the direction of monthly, and even higher time frames, to change. Charts can be like a mosaic where you can see something unseen from one viewing to another. We attribute this to the fact that when one makes a presentment of a particular point of view, that view takes on a bias, and that bias will block out information that does not support what is being presented. This point of view may be too in-house, but there is a sound basis for it.The fact that price has not rallied higher since the December swing low, coupled with a demonstrated inability to break overhead resistance [horizontal line], keeps the December low in question and positioned to be broken. Too soon to tell but something of which to be aware.

One cannot make out of the available information more than what is there. Price is at the lower ranges within a down trend, and also in the middle of a trading range where the level of knowledge is least reliable [because price can continue to move to the upper and lower areas of the TR and not exceed them, thereby staying within the established TR].

Sometimes, all one can do is let the market continue to develop until there is greater clarity for a move, one way or the other. This is one of those times. There is little to be gained from pushing on a string.

The pushing on a string theme is really prevalent throughout the gold/silver charts. There is nothing that indicates a shift from the down trend to one that can and will go higher. Almost everyone's expectations are for gold and silver to move dramatically higher. The charts do not support that collective opinion, at least not at this time.The comments made about the fiat Federal Reserve Notes apply here. The expectations for a change in the trend for PMs will take longer than most have expected, a fact we have been pointing out for the past 2 years. One's belief that gold and silver have to rally to considerably higher price levels is nothing more than a belief about reality, but few take into consideration that a belief about reality does not mean the belief reflects existing reality. The belief is real to the one who maintains it, but it is dysfunctional. The reality is that PMs prices remain low and will likely continue to remain low, at least for now, based on current price behavior patterns.

It's no secret that Dr. Janet Yellen is facing what could very well be the most important decision of her career. The Fed funds rate has been pegged to a zero bound rate of between zero and 25 basis points since December 16, 2008. And not surprisingly, the pressures are mounting for the Fed to just do "something".As one would expect, investor opinions differ widely on what the Fed will do or even should do. Some investors would argue that the economy is not ready to support a higher interest rate environment. Others would remind us that the stronger US dollar has created a problem for all of the internationally diversified companies who have reported some very disappointing results for the first quarter. And of course, because longer-term interest rates around the world remain at historical lows, long-term rates in the U.S. may not perform the way the Fed would like to see. What's more? There are many investors out there (including us) who simply wish the Fed would just get us off of the zero bound rate policy. We're no longer in a crisis, nor are we in a recession. There is modest growth in the economy, and it makes no sense to remain with the 0- bound interest rate policy.While all of the debating continues on, we believe that there is also some confusion about what the level of inflation really is at this point. Aside from the usual skeptics who claim that the traditional inflation metrics are deeply flawed, recent data seems to be sending some mixed signals between the three primary measures of inflation.

Figure 1 - Headline CPI Inflation

(click to enlarge)

The headline numbers for the Consumer Price Index have always been treated like an "orphan" index. It contains all of the factors which economists at the Bureau of Labor Statistics believe to be the most relevant, and the weightings of the various components are designed to reflect the appropriate mix of consumer spending habits. Indeed, housing accounts for the largest weighting at 41.4% of the index. Transportation and Food, meanwhile, represent 16.4% and 13.9%, respectively. We also note that total energy use represents 9.0% of the total CPI weightings including 5% for motor fuels and 4% for home energy expenditures. What's more? Both of these weightings are incorporated in the housing segment. Overall, we think it's a pretty fair representation of the typical consumer's monthly budget, and therefore, headline CPI inflation deserves to be monitored as closely as any other inflation barometer. The catch here is that food and energy prices (which account for nearly 23% of the CPI) are far more volatile than the other 77% of the CPI. As a result, investors have been conditioned to ignore the headline number even though it contains some very useful information. Indeed, 0^ inflation for the past four months seems quite relevant to us.

Figure 2 - Core CPI Inflation(click to enlarge)

Within the investor class, the Core CPI represents the most widely followed measure of inflation. Because the BLS also likes to exclude the volatile food and energy components, we get to see a more stable picture of inflation trends. Whether this is a more accurate representation of price inflation is a matter of debate. Many investors, in fact, are sharply critical of this particular index. They argue that Core CPI is a perfectly acceptable measure of inflation as long as you don't need to eat, drive a car or heat your home. Nevertheless, most people rely on the Core CPI and generally accept its various shortcomings.If we look closely at the last 12 to 18 months of data, there seems to be a stabilization of sorts in and around 1.6% to 1.8%. However, there is little to suggest that Core CPI is on its way to 2%. If Core CPI was the Fed's primary measure of inflation, then we would start handicapping the odds for a hike in Fed Funds for later this year. However, as the Fed constantly reminds us, they are data driven. So naturally, the Fed looks at every inflation indicator that it can find.

Figure 3 - The Implicit Price Deflator

(click to enlarge)

While most investors continue to track the Core CPI as if it were the only inflation indicator that matters, the Fed has long preferred the Implicit Price Deflator (IPD). This indicator, which is produced by the Bureau of Economic analysis, actually incorporates all goods and services, unlike the CPI which only includes a basket of goods and services. With a comprehensive view of inflation, it is little wonder the Fed takes the IPD rather seriously.As we illustrate in Figure 3, the Implicit Price Deflator took a dive in the first quarter of 2015, falling to a level of only 0.88% versus the 1.25% reading for Q4 2014. To be sure, as a comprehensive indicator, the IPD incorporates some exposure to both food and energy. But when Headline CPI has stabilized over the past four months, it's quite puzzling that the IPD would come under such pressure at this juncture.So at this stage of the cycle, there seems to be some real confusion about where inflation really stands. Headline CPI data tells us that inflation has been near zero for the past several months. Core CPI data, meanwhile, tells us that inflation is beginning to stabilize in a range of 1.6% to 1.8%. The Implicit Price Deflator, on the other hand, suggests that inflation has not stabilized at all. And because the IPD is every bit as important to the inflation discussion, it's not clear to us right now why the recent data has not raised more than a few eyebrows. Either way, we do not believe that Dr. Yellen & Co. would simply ignore the Implicit Price Deflator just because it's sending a different message.We believe that Janet Yellen really wants to lift the Fed Funds rate up and off of the zero-bound range. However, a number of confusing signals out there continue to stymie the Fed's decision making process. The Dollar is too strong. Or the economy is too weak. Greece is threatening to default. And of course China's economy is slowing down. And now the long-trusted Implicit Price Deflator is declining while the Core CPI may be stabilizing. From the Fed's perspective it's just too confusing.Even if the Fed raises rates later in 2015, we seriously doubt that they would then embark upon a 2-year campaign of constant rate increases. We think the Fed is far more likely to raise rates in a slow and deliberate manner. Every Fed move will likely be analyzed in excruciating detail, and they won't raise rates again until they are confident the capital markets can withstand the tightening of monetary policy. Dr. Yellen & Co. is not looking to "normalize" equity valuations. Nor is the Fed looking to invert the yield curve. We think the Fed's mission here is to figure out what constitutes the "New Normal" for a stable interest rate environment.

The Bottom Line

It's a sure bet that the markets will sell off the moment a Fed rate hike is announced. Equities will take a hit and global bond yields will rise. And when all is said and done, people will eventually realize that the entire debate surrounding the Fed's initial rate increase has been little more than a ridiculous distraction. Our Leading Indicators continue to suggest that the economy is more likely than not to maintain some forward momentum. The Fed is going to remain extremely accommodative for the foreseeable future. Building permit data continues to improve, albeit at a glacial pace. Manufacturing data from the ISM also continues to provide positive indications for new orders. Even the late-cycle indicator of commercial loan growth is on the right track.We like equities here. And we'll like them even more when the next correction comes along. If Greece manages to remain solvent we'll have plenty of other catalysts to watch for, including the Fed's initial rate hike. As if anyone needs reminding, we remain in a Secular Bull Market which provides investors with all the confidence they need to "buy on the dips".From a technical perspective, recent Bloomberg data tells us that just over 50% of all NYSE listed stocks are trading at or above their 200 day moving averages. This tells us that the ongoing new highs in the market are real, and that the market is not being held up by only a few over-priced momentum stocks. Even though people like to complain about the lofty valuations, the market remains fairly well supported right now.

MISHIMA – Recent breakthroughs in our understanding of molecular mechanisms have revolutionized many fields of biology, including cell biology and developmental biology. So it is no surprise that these advances are providing valuable insights into the field of evolutionary biology as well, including evidence supporting the nearly neutral theory of molecular evolution that I developed in 1973.

As is typical in science, each new discovery in evolutionary biology raises as many questions as it answers. Indeed, my field is now going through one of the most dynamic periods in its 150-year history.

For roughly a century after the publication of Charles Darwin’s On the Origin of Species, scientists believed that genetic mutations were governed by a process similar to that described by the father of natural selection. The idea was that individuals with superior genetic variants would be more likely to survive, reproduce, and pass on their genes than those without them.

As a result, harmful mutations would quickly die out. Beneficial ones would spread until the entire species carried them. Evolutionary changes, including morphological ones, were thought to be the result of the accumulation and distribution of beneficial mutations, and the genetic makeup of populations was believed to be close to homogeneous, with only a few rare, random mutations creating differences between one individual and another.

That view was challenged by the discovery of DNA. As it became possible to analyze an individual’s genetic makeup, it become apparent that there was much more variation within populations than prevailing evolutionary theory predicted. Indeed, individuals could have similar traits but very different gene sequences. This appeared to contradict the principles of natural selection.

One of the first attempts to square the theory with the evidence was proposed by my late colleague Motoo Kimura, who posited the existence of neutral mutations – gene variants that are neither advantageous nor harmful to an individual, and therefore not influenced by natural selection. Kimura examined the rate of evolutionary change of proteins and proposed the neutral theory of molecular evolution in 1968. His theory – which held that evolutionary changes at the molecular level are caused not by natural selection, but by random genetic drift – provided a good explanation for the genetic variation that researchers had discovered.

Kimura’s theory was simple and elegant, but the classification of mutations into the distinct classes – beneficial, neutral, or harmful – seemed too simple to me. My own work showed that borderline mutations, those with very small positive or negative effects, could be very important in driving evolutionary changes. This insight was the basis of the nearly neutral theory of molecular evolution.

The explosion of data on genomes and population genetics in the twenty-first century has not only lent new support to my 42-year-old theory; it has also uncovered broad new areas of research. Our knowledge of the structure and function of proteins, for example, has been greatly expanded through the discovery of dynamic folding processes. These are thought to provide flexibility in how proteins function, in a way that may be connected to nearly-neutral mutations.

Among the most interesting challenges in evolutionary biology is the attempt to identify the molecular mechanisms of gene expression that drive morphological evolution. The field is in the process of gaining a better understanding of a host of complex systems within individual cells. These molecular-level systems are at the heart of epigenetics – the study of changes in genetic function that cannot be explained by differences in DNA sequences.

Epigenetics is crucial for comprehending the link between the genetic composition, or genotype, and the traits we can actually observe. In higher organisms – such as humans – epigenetic processes are controlled by chromatin, a complex of macromolecules inside cells consisting of DNA, protein, and RNA. The way chromatin works is, in turn, shaped by genetic and environmental factors, making their functioning difficult to grasp. These rapidly evolving, highly variable macromolecules are well worth studying, however, as they may be the cause of some human diseases.

Another factor in the relationship between genetic composition and observable traits is the way that proteins can sometimes be modified. For example, protein enzymes can be turned on and off, thereby altering their function and activity. This process, like other forms of genetic expression, seems to be driven by a combination of innate and environmental factors.

No single mechanism, it seems, can be studied in isolation; at a very basic level, factors like selection, drift, and epigenetics work together and become inseparable. The deeper we dive into what we once thought were straight-forward evolutionary processes, the more wondrous and complex they are revealed to be.

Leftwing politicians are in electoral retreat across most of the western world. The one exception is the United States. At 15 per cent in the Democratic polls, Bernie Sanders, the senator from Vermont, is riding higher than any US socialist since Eugene Debs ran for the White House a century ago.

The fact that Mr Sanders has very little chance of unseating Hillary Clinton is beside the point. His popularity is dragging her leftward. If he flames out, other left-wingers, such as Martin O’Malley, the former governor of Maryland who entered the race at the weekend, are ready to pick up the baton. Elizabeth Warren, the populist Massachusetts senator, will continue to prod Mrs Clinton from outside the field. The more Mrs Clinton adopts their language, the harder it will be for her to reclaim the centre ground next year. Yet she is only following the crowd. A surprisingly large chunk of Democrats are happy to break the US taboo against socialism.

To most students of US politics, the phrase American socialism is an oxymoron — like clean coal or the Bolivian navy. A century ago, Werner Sombart, a German scholar, asked “Why is there no socialism in America?” It was a question that confounded Marxists. As the most advanced capitalistic society, the US was most ripe for a proletarian revolution, according to their teleology.

Yet the US refused to live up to its role. Europe’s finest intellectuals would have done better to have listened to the Irish immigrant in 1893 who on landing at Boston docks proclaimed: “If there’s a government here, I’m agin it.” They might also have read the first three words of the US constitution: “We the people”. For all the crimes committed against Native and black Americans, the US republic came into being without an aristocracy or feudal serfdom. It was born a middle class country with equality of opportunity as its creed. That made it a radically different place to the old world it had left behind.

Such differences are no longer obvious. No one, including Mr Sanders, is talking about nationalising chunks of the US economy. Yet his policies are radical by American standards. He wants a single-payer healthcare system, along the lines of Canada, or the UK. He would abolish tuition fees for instate higher education. He would drive big money out of US politics, redistribute income, mandate paid holidays and increase social security benefits. He would also break up the “too big to fail” Wall Street banks. “Are we prepared to take on the enormous political and economic power of the billionaire class,” asks Mr Sanders, “or do we continue to slide into . . . oligarchy?”

A highly energised minority of Democrats are responding to his message. Mr Sanders raised $1.5m from small donors within 24 hours of his launch in early May. Although Mr Sanders is trailing far behind Mrs Clinton, his support exceeds that of almost any candidate in the Republican field. Is it a temporary protest vote? Or should Mrs Clinton’s donors start to worry?

The answer to the first question will come when Democrats hold their first presidential debate. As a plain talker with an authentic personality, the septuagenarian Mr Sanders could strike an unflattering contrast to Mrs Clinton. Because Mrs Clinton is so strongly associated with dynasty and wealth — the Clintons earned more than $25m in speaking fees since the beginning of 2014 — she will feel all the more need to appropriate Mr Sanders’s rhetoric. But that will risk making her seem even less authentic. A majority of the US public already says they find Mrs Clinton untrustworthy. Mr Sanders will not become the 45th president of the US. But he could fatally wound Mrs Clinton’s chances. So, too, could Mrs Warren.

The answer to the second question is yes — Mr Sanders is no flash in the pan. Socialism found no audience in the US because most Americans felt they were middle class. High rates of social mobility gave most people the sense that their society was exceptional — and rightly so. As Richard Hofstadter, the US historian, said: “It has been our fate as a nation not to have ideologies but to be one.”

That is now in question. As recently as 2008, 63 per cent of Americans identified as upper middle or middle class. That has fallen to 51 per cent. Meanwhile, the share of Americans who self-identify as “working and lower class”, according to Gallup, has risen from 35 per cent to 48 per cent since 2008.

Perhaps fittingly, the share of Americans who identify as upper class is 1 per cent. That number hasn’t changed. But the belief that they are rigging the system is now mainstream.

To be clear, I am not forecasting a red dawn in the US. It is hard to imagine even a small portion of Mr Sanders’s agenda being enacted. But the rise of the Democratic left is every bit as real as the Tea Party’s surge among Republicans. Until recently, political scientists talked of “asymmetric polarisation” — meaning Republicans were moving more to the right than Democrats were moving left. Now Democrats are catching up. Meanwhile, more and more Americans profess intolerance for other people’s political beliefs. Elections are generally won in the centre. But it is smaller than it used to be. By US traditions, next year’s election is likely to present an unusually stark clash of ideologies. Whatever else he does from here, Mr Sanders has already ensured that.

After fruitless attempts to work against patronage systems in Iraq and Afghanistan, the U.S. ended up bankrolling the patrons.

By Mark Moyar

May 31, 2015 4:32 p.m. ET

On Feb. 1, 2006, after meeting with world leaders in London, the Afghan government signed a pledge to “expand its capacity to provide basic services to the population throughout the country.” It vowed to “recruit competent and credible professionals to public service on the basis of merit.” It also pledged to fight corruption, uphold justice and promote human rights.M.A. Thomas begins “Govern Like Us” by asking why Afghanistan has fallen so far short of this grand vision. A decade after Hamid Karzai’s pro-Western government replaced the Taliban, the organization Transparency International ranked Afghanistan at the very bottom of its corruption index, in a tie with North Korea and Somalia.

Govern Like Us

By M.A. Thomas
(Columbia, 254 pages, $45)

Popular authors such as Jeffrey Sachs and Jared Diamond have blamed the problems of Third World governance on a lack of financial resources. In their view, a condition of “underdevelopment” results from environmental and geographic disadvantages, such as climates conducive to infectious diseases and a lack of navigable waterways. With sufficiently large foreign investments to overcome these disadvantages, they say, economic development can take off and governance will take care of itself.Not so fast, says Ms. Thomas. Resources are not the sole problem or the biggest one. Third World governments make inefficient use of aid, she says, because they are loath to veer away from traditional strategies of governing. Among the most prominent of these strategies is patronage, whereby rulers provide money, jobs and favors in return for support. The Afghan government typifies a patronage-based system; and its particularly high corruption rating reflects the magnification of patronage by the particularly high amounts of foreign aid it receives. Westerners reflexively disdain patronage systems for their inefficiency and cronyism—labeling them “corrupt” as if by definition. Ms. Thomas believes such contempt to be unfair, and she marshals an impressive array of arguments and evidence to make her case. Government workers in poor countries, she notes, often live below the poverty line, which forces them to find additional jobs or to profit from their state-provided jobs. She quotes a public servant in the Congo who asks how, with a salary of less than $30 a month, government officials can “survive without accepting bribes.” Sometimes, she observes, state workers must in turn “bribe government officials in order to get paid.” She aptly notes that patronage politics prevailed throughout the world before the 19th century, at which time wealthy Western nations conducted protracted civil-service reforms.

Advertisement

&amp;lt;strong&amp;gt;&amp;lt;/strong&amp;gt;

Ms. Thomas acknowledges that governments in poor countries can and should do better, but Western countries have done more harm than good, she says, by stigmatizing patronage as immoral and demanding criminal prosecution for malefactors—at times as a condition of further aid. If we wish to praise and reward, she argues, we should focus on the degrees to which a Third World government is inclusive and just in distributing wealth and providing services, rather than demanding that it govern as expansively and impartially as, say, Sweden’s national cabinet.“Govern Like Us” is persuasive on many counts. Certainly the West has too often hurled accusations of corruption against foreign governments without due consideration of context and without an awareness of the unintended consequences of such charges. Taking an absolutist position against corruption and other manifestations of “bad governance”—such as the subordination of formal laws to the ruler’s discretion—has undermined Western efforts to bolster foreign allies. After years of fruitless attempts to work against patronage systems in Iraq and Afghanistan, the United States ended up working through such systems by bankrolling the patrons themselves; such a path proved the only way of subduing anti-American insurgents.Some Western experts may fault Ms. Thomas for discounting the moral dimension of corruption, arguing that her thesis lets abysmal leaders off the hook. While a hungry policeman may have no choice but to confiscate a chicken, they will say, the ruling classes of poor nations do not go hungry, and they daily confront choices between advancing their narrow self-interest and promoting the public good.That line of reasoning has considerable validity. Some national leaders and regional governors make certain that money allocated for, say, school textbooks is spent on school textbooks. But others use the money to enlarge their fleet of Mercedes sport-utility vehicles. A strong case can be made that the higher civic morality of leaders in such nations as South Korea, Oman, Chile, Singapore and Botswana explains why their governments work more justly and effectively than others of comparable size and resources—and why their economies do better, too. A nation’s ability to encourage entrepreneurship and investment depends to a substantial degree on whether its leaders are magnanimous enough to allow people other than their friends and relatives to amass wealth.Ms. Thomas forswears moral relativism, asserting that she does believe poor nations would be better off if their governments looked more like ours. Her downplaying of morality, though, may provide ammunition to those who would exclude morality entirely from international development, such as multiculturalists who explain away third-world vices as the by-products of Western imperialism, and “rational choice” theorists who interpret corruption as a rational response to existing institutions.Nevertheless, “Govern Like Us” delivers a thought-provoking and valuable reminder that sanctimonious insistence on moral perfection can be as self-defeating as moral indifference.Mr. Moyar’s book about U.S. national security under President Obama, “Strategic Failure,” is due out in June.

We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.